Lower search costs in online markets may harm consumers

Digital technology and the Internet have drastically reduced search cost and expanded consumers' reach for product varieties. Despite their tremendous benefits to consumers and society, online markets are not without perils. In particular, online markets appear to be especially plagued by the presence of many low-quality sellers. For example, the U.S. General Accounting Office reported in 2018 that 40% of products it purchased in an investigation from independent sellers on five major e-commerce websites, including Amazon and Walmart, were fake or low-quality. This raises the critical question of whether and when decreases in search cost can benefit consumers and improve market efficiency.


To address the question, we build a consumer search model in which products differ in horizontal attributes and unobserved quality (“experience goods”), and firms can establish quality reputation. We show that the inability of consumers to observe quality before purchase significantly changes how search frictions affect market performance. Under plausible conditions, reductions in search cost can indeed result in lower consumer and total welfare because of the decrease in investments by firms.


The analytical results of our model are especially relevant in the contemporary economy, where transactions are increasingly conducted through online markets in which search cost is low and product quality may be difficult to observe before purchase. Online markets are thus more susceptible to low-quality sellers and low-quality products than traditional markets.


Our results suggest that further diminishing search cost and increasing competition need not improve the performance of these markets. Rather, regulatory policies can play important roles in protecting consumers and increasing welfare. One such policy is to impose minimum quality standards, when feasible, to prohibit the sale of low-quality products. Another possibility is to provide stronger consumer rights for product return and other remedies to low quality.


This article is based on a publication in American Economic Journal: Microeconomics by Professor Tianle Zhang (Associate Professor in the Department of Economics and Director of Centre for Competition Policy and Regulation) and his co-authors,


Chen, Yongmin, Zhuozheng Li and Tianle Zhang. “Experience Goods and Consumer Search”, American Economic Journal: Microeconomics, Vol. 14 (3), 591-621, August 2022.